BEIJING, June 11 China's inflation, industrial
output and retail sales all flagged in May for a second straight
month of sluggish growth that galvanised policymakers last week
into taking their boldest action yet to combat a sharpening
slowdown.

A flurry of data over the weekend explained China's surprise
cut in interest rates on Thursday - its first since the global
financial crisis - by showing the extent of the domestic
economy's weakness. The rate cut followed a number of measures
designed to get money flowing back into the economy.

Beijing could offer more support if needed to combat risks
from the euro zone debt crisis, which claimed Spain this weekend
as the fourth country to seek financial support, and to promote
stability in a year of leadership change, analysts said.

"Monetary policy should continue to lean towards loosening,"
said Wang Jun, an economist at the government-backed think tank
China Center for International Economic Exchange.

Premier Wen Jiabao and other policymakers appeared to be
jolted by dire economic figures for April, released a month ago.
In recent weeks they have approved languishing investment
projects and launched a number of reforms to allow private
investment into sectors previously dominated by the state.

Thursday's quarter point rate cut briefly lifted financial
market sentiment, although that gave way to suspicions that the
timing of the reduction meant May's data would be worse than
expected. The suspicions were right.

Industrial output rose 9.6 percent in May from a year ago,
below expectations and further entrenching concerns the world's
second-largest economy faces its worst slowdown in years.

Retail sales were short of expectations, growing at their
slowest pace since February 2011, while investment in the likes
of real estate, infrastructure and factories increased at its
weakest year-to-date pace in close to a decade.

Consumer price inflation eased to 3.0 percent, below
expectations and the lowest level since the middle of 2010.

Producer prices fell 1.4 percent from a year ago, marking
the third straight month of producer price deflation.

"The slide in PPI... points to considerable sluggishness in
domestic manufacturing activity," said Xianfang Ren, economist
at IHS Global in Beijing.

China is not alone in slowing down. India reported its
weakest quarterly growth in nine years and Brazil almost stalled
in the first quarter, raising doubts as to how much emerging
markets can drive the world economy as industrialised nations
struggle with debt.

TRADE SURPRISE

While manufacturing-related data pointed to domestic
economic weakness, China's exports and imports figures were much
stronger than expected.

Exports rose 15.3 percent in May from a year earlier, more
than double expectations, and up from April's 4.9 percent rise.
A record monthly decline in the yuan against the dollar in May
could have helped exports.

Imports gained 12.7 percent, also more than double
expectations, and well above April's 0.3 percent rise. That left
a trade surplus of $18.7 billion, the biggest since January.

Some imports may reflect optimism that the China's stimulus
measures will translate into a revival of economic momentum.
Copper imports - normally an indicator of economic activity -
were surprisingly strong and crude oil imports hit a record high
of 6 million barrels a day.

External demand was not nearly as dire either. Exports to
the United States rose 23 percent in the first five months of
this year compared with a year earlier, the strongest
year-to-date pace in 2012.

Shipments to the European Union - China's biggest foreign
customer - grew 3.4 percent on the same basis, the highest since
January. The pace of exports to Southeast Asia hit a three-month
high.

Still, China can not count on exports alone. The government
has set a more modest target of boosting exports and imports by
10 percent this year compared with the pace of more than 20
percent that characterised 2010 and the early part of 2011.

"The trade situation is still relatively grim," the official
Xinhua news agency paraphrased China's Commerce Minister, Chen
Deming, as saying. "If lucky, we will be able to keep annual
growth of around 10 percent."

Concerns are growing that the euro bloc may slip back into
recession and even break up. China's two-way trade with Europe
grew by a lackluster 1.3 percent, showing that Europe can't look
to Chinese buyers for much of a boost either.

Reflecting the harder times, some struggling Chinese
exporters are offering clients steep discounts in return for
bulk orders upfront, trade and investment lawyer Dan Harris of
Harris & Moure in Seattle wrote recently in his China Law blog.

"This will be essential for China to avoid a hard landing
and for its domestic demand to be upheld," they said in a note
to clients.

SLOWDOWN

China's economic expansion is widely expected to dip below 8
percent year on year in the second quarter. That would mark the
sixth consecutive quarter of lower growth and reflect the sort
of pace seen during the trough of the global financial crisis in
the winter of 2008/09.

Full-year growth is expected to drop to 8.2 percent, the
lowest level since 1999, a Reuters poll showed in May. The
government has set a growth target of 7.5 percent for 2012.

Indications abound of a slowdown in the real economy. Crude
refinery runs fell 0.7 percent in May from a year earlier, the
second straight month of decline and power generation growth was
sluggish at just 2.7 percent after its weakest pace in three
years in April.

Signs of the domestic economy's struggle explains Beijing's
heightened concerns. The fall in consumer inflation to well
below the official 2012 target of 4.0 percent, meanwhile, gave
policymakers room to cut rates, analysts said.

A rate cut tends to affect an economy broadly. Beijing's
previous "fine tuning" policy had included more targeted
measures, such as cutting required reserves for banks.

These are key price indicators for policymakers, always
sensitive to social stability and more so this year when the
Communist Party will select a new leadership.

The transition has already been unsettled by the purge of
populist politician Bo Xilai, who had ambitions to be elevated
to China's top decision making body, and the murder scandal
surrounding his fall.

Beijing wants to bring real estate developers to heel
following a building frenzy sparked by a 4-trillion-yuan
stimulus package during the global financial crisis, thereby
addressing common people's complaints that housing prices are
too high. But equally it hardly wants a sharp downturn to bring
citizens into the streets, analysts say.

Partly reflecting the slowdown in the pace of real estate
investment, May's data showed fixed asset investment grew 20.1
percent in the first five months of the year, the lowest pace in
nearly a decade.

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